Do Audit Committees Effectively Engage in Voluntary Reporting to Manage Legitimacy? Evidence From a Large-Scale Textual Analysis

48 Pages Posted: 16 Feb 2018 Last revised: 6 Apr 2020

See all articles by Michelle Draeger

Michelle Draeger

Colorado State University, Fort Collins - Department of Accounting

Bradley Lawson

Oklahoma State University - Stillwater - School of Accounting

Jaime J. Schmidt

University of Texas at Austin

Date Written: March 23, 2020

Abstract

This study investigates (1) whether legitimacy management motivates audit committees to voluntarily disclose their financial reporting oversight activities in the audit committee report and if so, (2) whether such legitimacy management disclosure strategy is effective. The answer is important because, if true, it would suggest that (1) a regulatory mandate to require expanded audit committee reports may not be necessary, and (2) audit committees are able to use disclosures to effectively maintain and restore their legitimacy. Performing a large-scale textual analysis of over 8,000 U.S. companies’ audit committee report disclosures issued between 2006 and 2017, we find that audit committees voluntarily increase disclosure of their financial reporting and auditor oversight activities following (1) the SEC’s 2015 Concept Release which encouraged greater audit committee disclosure and (2) a company’s announced need to restate its financial statements. In addition, we find that increased audit committee disclosure partially mitigates the negative impact of a restatement on shareholder satisfaction with the audit committee, as measured by shareholder votes to ratify the audit committee members and audit committee turnover.

Keywords: audit committee reports, voluntary disclosure, textual analysis, LIWC

JEL Classification: M41, M48

Suggested Citation

Draeger, Michelle and Lawson, Bradley and Schmidt, Jaime J., Do Audit Committees Effectively Engage in Voluntary Reporting to Manage Legitimacy? Evidence From a Large-Scale Textual Analysis (March 23, 2020). Available at SSRN: https://ssrn.com/abstract=3118408 or http://dx.doi.org/10.2139/ssrn.3118408

Michelle Draeger

Colorado State University, Fort Collins - Department of Accounting ( email )

256 Rockwell Hall
Fort Collins, CO 80523
United States

Bradley Lawson

Oklahoma State University - Stillwater - School of Accounting ( email )

College of Business Administration
415 Business Building
Stillwater, OK 74078
United States

Jaime J. Schmidt (Contact Author)

University of Texas at Austin ( email )

Austin, TX 78712
United States

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